A Framework for Climate
Change Policy
by Michael A. Toman
Differing interpretations of the evidence—and differing interests—complicate
efforts to negotiate goals and actions regarding climate change. While no
easy cookbook-style recipe can indicate what should guide thinking about risks
and policies, several maxims seem worth applying.
A
great deal of controversy surrounds the issue of
climate change. Some say that climate change is
one of the greatest threats facing humankind, one that
calls for immediate and strong controls on greenhouse
gases from fossil fuel burning. Others say that the
risks are weakly documented scientifically, that adaptation to a changing climate will substantially reduce
human vulnerability, and that little action is warranted
other than study and development of future technological options. The same kinds of divides arise in
discussing policy options to reduce greenhouse gas
emissions, with some predicting net benefits to the
economy and others fearing the loss of several percentage points of national income.
These disagreements surface in the efforts of the
international community to negotiate goals and
actions under the 1992 Framework Convention on
Climate Change. They reflect different interpretations
of the evidence and different interests. To help sort
through the tangle, I have summarized some ways to
think about climate change risks and policies that may
be useful in considering both international agreements
and actions by the United States.
Decision Framework
While no easy recipe indicates what should go into a
climate change decision framework, several maxims
seem worth applying.
Think comprehensively about risks and costs. Efforts to gauge
the benefits of reducing climate change risks should
be as broad as possible. Elements to consider include
the impacts on market goods like agriculture; effects
on human health; effects on nonmarket resources like
wilderness areas and wetlands that provide both recreational values and ecological functions; and the ancillary benefits of greenhouse gas reduction such as
improved air quality. It is just as important to think
broadly about control and adaptation costs, including
indirect effects on the economy as well as direct compliance expenditures.
Given the current state of knowledge, it will be
difficult to attach monetary values to a number of risk
reductions and costs. This uncertainty is likely to
persist for many risk categories (especially those related to ecological impacts) even if uncertainty about the
physical manifestations of climate change declines.
However, lack of information should not be confused
with negligible risk. To be useful to decisionmakers,
moreover, an assessment of climate change risks
should go beyond a sequence of “best guess” or “worst
case” estimates of atmospheric changes, biophysical
impacts, and socioeconomic impacts to consider the
variability of possible consequences.
Think long-term. The risks posed by climate change
depend on the path of changes in the atmospheric
concentration of greenhouse gases over many decades
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A F R A M E W O R K F O R C L I M AT E C H A N G E P O L I C Y
RFF Climate Change Research
RFF launched its Climate Economics and Policy
Program last fall to conduct basic and applied
research and policy analysis related to global climate change. An initial set of research projects
under way includes:
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Bringing Uncertainty into the Equation
When Calculating Climate Change Risks
Carbon Consequences of Tax System Reform
Carbon Policy and Endogenous Technical
Change
Discounting in Intergenerational
Decisionmaking
Economic Analysis of Greenhouse Gas
Emissions Trading
Effective Environmental Policy in the
Presence of a Distorted Tax System
Electricity Restructuring and the Costs of
Controlling CO2
Impacts of Climate Change Mitigation on
Other Environmental Problems
International Cooperation for Effective and
Economic Greenhouse Gas Limitation
Vulnerability of Low-Income Households to
the Hydrologic Effects of Climate Change
To broaden understanding of climate change
concerns, RFF is also organizing workshops and
producing a series of Issue Briefs. The first of these,
“Climate Change Risks and Policies: An Overview,”
is the source of Michael Toman’s article.
For more information:
http://www.rff.org/research/programs/climprog.htm
and centuries, not just on the emissions of these gases
over a relatively short period of time. We are dealing
with the cumulative effect of many smaller influences
on the biosphere—an effect with a great deal of natural inertia.
Having to confront the distant future greatly complicates risk assessment and the development of consensus for policy actions. To be effective, at least some
actions must anticipate long-term impacts, before all
of the scientific evidence is clear. Our political system
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arguably is less effective at taking such actions than
responding to a single large and immediate concern.
On the other hand, the long-term nature of climate
change risks means we can hone our scientific understanding and policy responses over time; we need not
do everything right away.
Address adaptation. In areas such as agriculture, managed forestry, and human settlements, intuition and
experience in other contexts suggest a medium-tohigh degree of potential adaptability to natural
changes, given enough lead time and investment.
Adaptation possibilities include development of new
plant varieties and crop patterns, changes in irrigation
technology, relocation of coastal infrastructure, and
expanded protection of wetlands to compensate for
their potential future damage.
Adaptation may be difficult in some cases, for
example, where damage occurs to natural ecosystems
whose functions are not well understood. But even
when adaptation capacity seems very limited, it
should not automatically be treated as negligible.
Improving the capacity to adapt where it is weak—as
in many poor, developing countries—may be one of
the most effective ways to respond to some climate
change risks, at least until the cost of stabilizing
atmospheric concentrations of greenhouse gases falls.
Think internationally. Rich and poor countries argue
over how the burden of greenhouse gas emissions
reductions should be allocated. The ongoing tension
can only be resolved by negotiation among the parties
themselves. However, long-term global climate change
risks will not diminish to any significant degree until
total global emissions are reduced, and this will require
global cooperation, not just action by today’s rich
countries. This point deserves to be underscored in
light of the likely future decline in the share of total
emissions from advanced industrial countries (currently about 50 percent) as economic growth proceeds in
other areas. The efficacy of any policies the United
States pursues to reduce climate change risks thus will
depend on the actions taken by others.
Keep distributional issues in mind. Climate change risks
and response capacities vary with income level. There
is also a fundamental asymmetry between the timing
of response costs—which will largely be borne by the
current generation—and the benefits of reduced climate change—which will largely accrue to future
generations. This asymmetry means we cannot simply
RESOURCES FOR THE FUTURE
compare the costs of reducing the risk with the value
of enjoying the ultimate benefits. Instead, we must
assess both the costs members of the current generation would bear and the strength of our concerns for
those who would be vulnerable in the future. These
are economically and ethically complex questions
about which we know little, and they require mature
political debate.
Estimate control costs realistically. Some people argue that
market inefficiencies are so rife, and opportunities for
innovation so plentiful, that emissions abatement is a
low-cost proposition or one that might even benefit
the economy. This point of view is in sharp contrast to
the outputs of economic models indicating that stabilizing emissions may cost as much as several percent
of a country’s gross domestic product (implying that
deeper cuts in emissions to reduce greenhouse gas
concentrations in the atmosphere would be even more
expensive).
Most people who have looked at the debate seem
to agree that some low-cost improvements in energy
efficiency exist, for example, by reducing subsidies
and other market distortions. However, it is open to
question whether these opportunities are substantial
compared with, say, the amount of abatement needed
to stabilize greenhouse gas emissions. Against the
backdrop of future increases in global energy demand,
the cost of longer-term reductions in greenhouse gas
emissions cannot help but rise unless further progress
occurs in the development of nonfossil energy alternatives. In assessing medium- to long-term costs, it is a
mistake to assume technical progress as a panacea for
reducing abatement costs, or no technical progress at
all.
Another argument is that our tax system is so
distorted that we can levy energy taxes to reduce
greenhouse gas emissions and use the proceeds to
lower other taxes that hamper economic growth.
However, recent analysis calls into question this “double dividend.” The basic conclusion of this analysis is
that broader-based taxes like those on income generally create less overall economic distortion than narrower-based taxes like those on energy. Thus, adjusting
other taxes might dull the economic pain of an added
energy tax, but not to negligible levels. Moreover, any
tinkering with the tax system is possible only if politicians take the difficult step of imposing higher energy
taxes in the first place.
RFF Council Takes Up Climate Topic
The RFF Council took up the topic of “Climate
Change: Policy Issues and Options” at its seventh
annual meeting in April. Council members heard
from scientists as well as experts in government,
academia, and the business and environmental
communities on this critical and controversial issue.
In a plenary session on how to think about
climate change policy, RFF Senior Fellow Michael
Toman was joined by American Petroleum Institute
Executive Vice President William O’Keefe and
Daniel Lashof, a senior scientist at the Natural
Resources Defense Council. Toman and RFF Senior
Fellow Raymond Kopp later led respective discussions on technical responses to climate change and
implementation of policies.
Rafe Pomerance, the U.S. Department of State’s
deputy assistant secretary for environment and
development, spoke of the challenges of negotiating
international climate agreements. Everett Ehrlich,
the U.S. Department of Commerce’s under secretary
of commerce for economic affairs, discussed the
implications of climate change policies as they
might affect the United States in particular.
Most studies of greenhouse gas abatement costs
assume the application of idealized least-cost policy
measures like a comprehensive “emissions trading”
program or a comprehensive “carbon tax” based on
the carbon content of different fossil fuels. Abatement
costs will be higher (perhaps considerably so) if less
than ideal policies are used in practice. The debate
about which greenhouse gas reduction targets are
appropriate cannot be conducted independent of
discussions about what concrete measures can and
should be used to actually restrict emissions.
Implications for Policymaking
The decision framework I have described has several
implications for formulating policy.
Allow flexibility in the timing of cumulative emissions reductions to
reduce overall costs. The potential cost savings from
intertemporal flexibility in meeting a particular longterm emissions-reduction goal depend on the assumptions made, but it appears that savings of at least 20
percent or more are possible. Taking this approach
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does not mean that all or even most policy actions are
deferred to the future. It simply means that the
emphasis is placed on sequential decisions—some of
which are better taken sooner and others later. Unless
we start with a longer-term perspective, it is impossible to consider such tradeoffs.
Incorporate economic incentives into emissions-reduction policy.
These incentives include carbon taxes on energy
sources and various forms of tradable permit systems
that would effectively establish quotas on emissions
but allow their trade. Sources with higher control
costs could (in effect) pay emitters with lower control
costs to assume more of the reduction burden.
Provide opportunities for emissions reductions wherever possible.
One example of an abatement incentive program that
takes place outside industrialized countries is the socalled “joint implementation” approach, whereby
emitters in, say, the United States, can satisfy any
emissions reductions requirements they face through
actions that reduce emissions in other countries.
Formal emissions trading programs among sources in
countries with quantified emissions reduction targets
also are possible. Significant practical questions need
to be answered to structure flexible yet verifiable
programs for international (and intertemporal) emissions trading. However, the magnitude of the potential
cost savings underscores the value of seeking to overcome these challenges. Depending on the assumptions
made, savings of 50 percent or more seem possible.
Build knowledge and improve technology. Even if we do all
the best things possible to reduce emissions, given the
current state of knowledge, economic growth—especially in developing countries—will continue to push
up greenhouse gas emissions and atmospheric concentrations. Unlike limiting pollutant gases such as
sulfur dioxide, for which a variety of technical control
options is available, limiting carbon-dioxide emissions
requires reduced energy use, greater energy efficiency,
or substitution of energy sources with lower carbon
content.
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To avoid unacceptable climate change risks ultimately will require a fundamental change in our energy systems toward much greater reliance on other
energy sources—solar, biomass, and possibly nuclear.
To make the transition economically manageable will
require continued or enhanced investments in basic
and applied knowledge.
The government has an inescapable role to play
not just in creating the incentives for private parties to
seek better technologies but also in funding the development of basic knowledge about technology as well
as climate change impacts. At the same time, we must
recognize that our understanding of what policy can
actually do to induce climate-friendly innovation is
weak at best. We must also recognize that diverting
resources from other areas to research on low-carbon
energy systems may well reduce innovation elsewhere
in the economy—technical progress is not a free good.
Increase emphasis on adaptation. Adaptation is part of an
optimal response strategy in any event. Indeed, it is
the means of transcending the narrower concern
about our vulnerability to climate change to a broader
concern with global-scale changes that place stress on
natural systems and pose threats to human well-being.
Furthering human capacity to adapt to climate change
entails investment in improved understanding of the
options and their international application. It also
entails adjusting economic and other distortions that
limit adaptation potential (such as assistance programs
that subsidize coastal development or water use). In
many cases, the best climate policy may have little to
do with greenhouse gases or climate per se, and much
more to do with developing better basic social infrastructures for natural resource conservation and use
and for public health protection.
Michael A. Toman directs RFF’s Energy and Natural Resources Division and coordinates its Climate Economics and Policy Program.